'Comply or Explain': Market Discipline and Non-Compliance with the Combined Code

11 Pages Posted: 17 Sep 2006

See all articles by Iain MacNeil

Iain MacNeil

University of Glasgow - School of Law

Xiao Li

University of Glasgow - School of Law

Abstract

The "comply or explain" principle adopted by the UKs Combined Code on Corporate Governance has now been in operation for 12 years. In this paper we focus on two aspects of this regime. The first is the nature of the explanations that have been given by companies with an established record of non-compliance ("serial non-compliers") and the role of the market in permitting deviations from the Combined Code. In particular, we consider the significance of share price performance as a factor that is relevant in justifying non-compliance and the extent to which investors appear to rely on this indicator rather than engage in the more difficult task of judging the relative merits of the Code provisions against alternatives. Our approach differs from much of the research linking corporate governance with financial performance in that it focuses on the potential influence of financial performance (as measured by share price) on governance structure rather than vice versa. Our study of FTSE 100 serial non-compliers suggests that there is a prima facie link between share price performance and investors tolerance of non-compliance with the Combined Code. The second issue we examine is the link between the principle of "comply and explain" and the self-regulatory status of the Code. We conclude that the benefits of flexibility generally associated with the self-regulatory status of the Code are overstated and that the Code could be integrated into mainstream company law.

Suggested Citation

MacNeil, Iain and Li, Xiao, 'Comply or Explain': Market Discipline and Non-Compliance with the Combined Code. Corporate Governance: An International Review, Vol. 14, No. 5, pp. 486-496, September 2006. Available at SSRN: https://ssrn.com/abstract=930775 or http://dx.doi.org/10.1111/j.1467-8683.2006.00524.x

Iain MacNeil (Contact Author)

University of Glasgow - School of Law ( email )

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Xiao Li

University of Glasgow - School of Law ( email )

Stair Building
5 - 8 The Square
Glasgow, Scotland G12 8QQ
United Kingdom
+ 0141 330 5863 (Phone)
+ 0141 330 4900 (Fax)

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